In every crisis lies an opportunity, it is said. At the very least, today's hydrocarbon crisis should re-open India's forlorn debate on pushing oil and gas into a closer market embrace as a sector. Ever since we ran into supply snarls that began with yet another war in West Asia, shock-absorbers have been in focus, along with our import dependence.
To be sure, this is no ordinary shock. International Energy Agency head Fatih Birol has described it as being worse than the twin oil shocks of the 1970s and the gas crisis after Europe's 2022 outbreak of war combined. For enduring resilience, however, we need structural change.
Policy must not just enlarge the scope for domestic exploration and production while we speed up our transition to clean energy, both of which demand a comprehensive central plan, but also explore the advantages of a vibrant domestic market for oil products that can get supply in better sync with demand to deliver superior outcomes.
What might such a market-reform agenda look like? First, cast GST's net to cover all petroleum products (not just a few); second, free retail fuel pricing of state influence (in practice); and third, privatize all state-run oil marketing companies (barring one).
All three aim for market orientation. All require political will.
Consider the benefits. Full coverage of petroleum products by India's goods and services tax (GST) would enable input tax credits on fuel inputs, easing a cost cascade that burdens businesses. Since local taxes on these items help fill state coffers, some states may resist losing levy control; but they should view it as a small price to pay for future gains in terms of economic efficiency. A patchy GST net keeps the economy's cost base higher than it should be. We all benefit if we fix that deficiency.
Another reform that got stuck midway was a gradual move away from retail price controls in this sector. Given India's stark disparities, some essentials need subsidy-funded price caps, but the policy space that our oil marketing companies (OMCs) were given to price fuels freely has rarely been exercised by the trio owned by the government.
As Indian Oil, Hindustan Petroleum and Bharat Petroleum dominate fuel pumps, prices are found to move by central command. Undeniably, consumer price-sensitivity lends such decisions a political angle, but tightly held price lines deprive demand of flexibility. When prices rise in line with crude costs, they reduce at least discretionary usage.
Dynamic rates would not just match demand better with supply, but also help modulate imports and adjust our trade balance to that extent. Pressure on the rupee may ease too. On the other hand, if we persist with rigid pricing, either OMCs or the Centre must pick up the tab for supply shocks. Both options are distortive.
One distorts the market value of OMCs and the other contorts India's fiscal plan. Moreover, state backing for retailers dishevels the field for private players, which simply get pushed out of play by fuel underpricing.
If real rivalry takes hold, efficiency gains could reward consumers and stimulate private investment. For too long has this sector remained a legacy of India's pre-reform era. It needs to change.